Navigating the GST Maze: Implications on Employer-Provided Services and Notice Period Recoveries

Introduction-

The implementation of the Goods and Services Tax (GST) has transformed the landscape of taxation, affecting a wide range of economic activities and sectors. One area that has garnered increasing attention is the implication of GST on services provided by an employer to its employees and the recoveries made by the employer for notice periods. As the tax framework continues to evolve and adapt to the changing business environment, understanding the nuances and intricacies of how GST influences the employer-employee relationship and the financial dynamics surrounding notice periods is crucial. In this article, we delve into the implications and intricacies of GST in these specific contexts, shedding light on the regulatory framework and its impact on employers and employees.

Notice Pay Recovery

A notice period recovery, also known as notice pay, is a contractual provision in employment agreements where an employee, upon resignation or termination, continues to work during a specified notice period, but the employer has the right to recover a portion of the employee`s salary or benefits during this time to compensate for costs and disruptions related to the employee`s departure.

When an employee decides to leave their job, they are typically required to provide their employer with advance notice as specified in their employment contract or local labor laws. During this notice period, the employee continues to work for the company and receive their regular salary. However, in certain cases, the employer may have the option to recover a specific portion of the employee`s salary or benefits, typically in lieu of the notice period.

Notice period recovery is designed to compensate the employer for the costs and disruptions associated with an employee`s departure, as the employer may need to make arrangements to find a replacement or reassign the employee`s duties during the notice period. The recovery amount is often a fixed proportion of the employee`s regular compensation and is outlined in the employment contract or company policies.

Thus, at times when recoveries are made GST officers are Audit parties used to demand tax on the same but this issue has ultimately been addressed vide Circular No. 178/10/2022-GST Dated:3rd August, 2022, Relevant extracts of which are reproduced as under-

"7.5 An employer carries out an elaborate selection process and incurs expenditure in recruiting an employee, invests in his training and makes him a part of the organization, privy to its processes and business secrets in the expectation that the recruited employee would work for the organization for a certain minimum period. Premature leaving of the employment results in disruption of work and an undesirable situation. The provisions for forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period are incorporated in the employment contract to discourage non-serious candidates from taking up employment. The said amounts are recovered by the employer not as a consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation. Further, the employee does not get anything in return from the employer against payment of such amounts. Therefore, such amounts recovered by the employer are not taxable as consideration for the service of agreeing to tolerate an act or a situation."

Perquisites provided by the employer-

Perquisites, commonly known as "perks," refer to supplementary benefits or advantages that employers offer to their employees in addition to their standard salary or wages. These benefits encompass a wide array of offerings, such as company-provided vehicles, housing accommodations, health insurance, gym memberships, and more. Perquisites are typically an integral part of an overall employee benefits package and are designed to elevate job satisfaction and employee well-being. The nature and extent of these perquisites can vary significantly based on factors like the employee`s role, corporate policies, and industry standards. Perquisites serve as a valuable tool for talent acquisition and retention, as well as for fostering employee happiness and productivity.

Common Perquisites Include:

1. Company Cars: Providing employees with access to company-owned or leased vehicles.

2. Housing: Offering on-site or subsidized housing for certain positions, such as live-in staff or expatriate employees.

3. Health Insurance: Covering or subsidizing health insurance premiums for employees and their dependents.

4. Gym Memberships: Furnishing employees with access to fitness facilities or health club memberships.

5. Meals and Refreshments: Providing free or subsidized meals and snacks to employees during work hours.

6. Education Assistance: Supporting employees with tuition reimbursement or access to educational programs.

Now the question that arises is whether various perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are liable for GST?

This issue has also been clarified vide Circular No. 172/04/2022-GST Dated: 6th July, 2022 extracts of which reproduced as under-

"1. Schedule III to the CGST Act provides that "services by employee to the employer in the course of or in relation to his employment" will not be considered as supply of goods or services and hence GST is not applicable on services rendered by employee to employer provided they are in the course of or in relation to employment.

2. Any perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are in lieu of the services provided by employee to the employer in relation to his employment. It follows therefrom that perquisites provided by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same are provided in terms of the contract between the employer and employee."

Eligibility of ITC on facilities provided to employees-

Through the previous segment we have understood that perquisites provided by employers to their employees are not to be treated as supply for the purpose of levy of GST but then the question arises whether the Input tax credit on procuring such goods or services to be provided as perquisites can be availed by the employer or is it blocked in accordance with the provisions of section 17 of the Act.

Input Tax Credit is not available on various supplies specified under Sec 17(5) of the CGST Act, 2017. As per Sec 17(5)(b) of the CGST Act, ITC shall not be available on the following.

Sec 17(5) :-

Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, Input tax credit shall not be available in respect of the following, namely:—

(b) the following supply of goods or services or both—

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of Motor vehicles, vessels or aircraft referred to in clause (a) or (aa) except when used for the purposes specified therein, life insurance or health insurance :

(ii) membership of a club, health and fitness centre;

(iii) travel benefits extended to employees on vacation such as leave or home travel concession.

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

A question now arises is that Whether the proviso at the end of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the entire clause (b) or the said proviso is applicable only to sub-clause (iii) of clause (b)? This issue has been clarified vide Circular No. 172/04/2022-GST Dated: 6th July, 2022 extracts of which reproduced as under-

"1. Vide the Central Goods and Service Tax (Amendment Act) 2018, clause (b) of sub-section (5) of section 17 of the CGST Act was substituted with effect from 01.02.2019. After the said substitution, the proviso after sub- clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act provides as under:

"Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force."

2. The said amendment in sub-section (5) of section 17 of the CGST Act was made based on the recommendations of GST Council in its 28th meeting. The intent of the said amendment in sub-section (5) of section 17, as recommended by the GST Council in its 28th meeting, was made known to the trade and industry through the Press Note on Recommendations made during the 28th meeting of the GST Council, dated 21.07.2018. It had been clarified "that scope of Input tax credit is being widened, and it would now be made available in respect of Goods or services which are obligatory for an employer to provide to its employees, under any law for the time being in force."

3. Accordingly, it is clarified that the proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act."